When will the good times in the stock market end?
The conventional thinking is that the party will end when the Federal Reserve takes the punch bowl away… when it stops artificially stimulating the economy.
But is that right?
I don’t think it is…
Right now, stocks are soaring and real estate is hot. But that’s in part because the Fed has cut interest rates to zero, and it has been pumping money into the economy to keep the party going.
[ad#Google Adsense 336×280-IA]Most folks believe that as soon as the Fed’s stimulus stops, the party will be over.
But history tells a different story…
The last time the Fed took the punch bowl away was in 2004…
It raised interest rates from 1% in 2004 to 5% in 2006.
What happened to stocks around that time?
Take a look…
The stock market soared from around 1,000 to around 1,500 – a 50% gain.
Now think about that…
Interest rates soared. And so did the stock market.
Just like today, the Fed had cut interest rates to incredibly low levels to try to boost the economy.
It worked… The economy started to recover.
So the Fed felt it could move interest rates from an extremely low level to a more normal level.
The Fed hiking rates was a signal to everyone that the economy was back on track – that it didn’t need help from the Federal Reserve anymore. People bought stocks… And the stock market soared.
Could the same thing happen again today? Absolutely…
Let me be clear… I don’t expect the Federal Reserve to raise rates any time soon. I believe we’ll see low rates through 2015 at least.
But even when the Federal Reserve starts to raise interest rates, it doesn’t have to mean the end of rising stock prices.
I expect investors to interpret this move just as they did in 2004-2006 – as a signal that the economy is finally back on its feet again.
In short, you want to own stocks now.
The conventional thinking is that the party in the stock market will end when the Fed takes the punch bowl away. I think the conventional thinking will turn out to be wrong…
Don’t sell when you hear that rates are finally going up… Chances are, people will figure it means the economy is finally “better” – and stock prices will keep on rising.